Unstructured Finance

Why Steven Cohen won’t turn SAC into a family office

By Matthew Goldstein

Every time the insider trading investigation thrusts Stevie Cohen back into the spotlight, there’s always speculation about whether the billionaire trader will simply give back money to his outside investors and convert his $14 billion SAC Capital into a family office in order to avoid the unwanted headlines. But as tempting as that might be to the publicity-averse Cohen, the well-known trader has a big financial incentivel to keep managing money for his outside investors.

SAC Capital’s fee structure–one of the highest in the $2 trillion hedge fund industry–probably pays for a good chunk of Cohen’s overhead, say people in the hedge fund industry. These sources say that by charging a 3 percent asset management fee and skimming off as much as 50 percent of the firm’s trading profits, SAC Capital’s outside investors provide Cohen with a rich source of cash to pay his 900 or so employees.

Now sure, if Cohen were to return the roughly $6.3 billion in outside money that SAC Capital manages, he could reduce his workforce dramatically and move his operation out of its spacious offices at 72 Cummings Point Road in Stamford, Conn. But with billions of his own money invested in SAC Capital, Cohen would still need to employ a healthy crew of analysts and traders to manage his personal wealth in order to get the kind of double-digit returns he’s accustomed to. Last year, SAC Capital was up a little over 10 percent after accounting for fees–compared to the industry average of about 5 percent.

And returning all that outside money would also limit Cohen’s ability to make big trades. When you factor in leverage — or borrowed money — SAC Capital effectively manages $43.8 billion in assets — roughly 2.7 times the firm’s $14 billion in invested dollars from customers, Cohen and his employees. Strip away the outside money, it would severely restrict Cohen’s ability to make large trades in many different sectors and markets.

That’s why when an big outside investor like Blackstone gives the signal that it has no plans to redeem its $550 million, its more than just symbolism to Cohen and SAC Capital. For a fund like SAC Capital that operates at nearly 3 times leverage, that $550 million investment is really worth more than $1.5 billion in investible assets.

Wall Street channels Charles Dickens in 2012

By Lauren Tara LaCapra

As 2012 comes to an end, it’s clear that Wall Street has had the best-worst year in quite some time.

Bank profits are at record highs and lows, driven by free money from the Fed that they can’t make any money with, and a historically small number of historically huge deals. Facebook’s IPO – among the biggest ever – happened this year, and it was an enormous failure and a terrific success all at once.

And if that’s not enough to convince you, just take a look at the big-tiny payday that Wall Street employees are expected to get this year: bonuses for bankers, traders and money managers are supposed to rise up to 10 percent, in what a top pay consultant called one of the weakest years in a decade or more. Since big banks have been required to shift more bonus money into restricted stock with clawback provisions, some employees even feel like they’re getting punished by those bigger paychecks.

Obama hearts El-Erian

By Sam Forgione and Matthew Goldstein

OK, so it’s not a big gig like being nominated to head the Treasury Dept. But President Obama’s decision to tap PIMCO’s Mohamed El-Erian to head the President’s Global Development Council is no insignificant matter.

As the co-chief investment officer of the giant bond shop founded by Bill Gross, El-Erian is seen as the eventual heir apparent to run the Newport Beach, Calif firm. And El-Erian increasingly has become one of PIMCO’s most visible faces—maybe even more than Gross himself these days–when it comes to talking about what ails the U.S. and global economies.

The assignment is another indication of PIMCO’s growing ties to the Washington establishment, something that has developed as the firm has grown to manage $1.92trillion in assets and played a starring role along with BlackRock in helping to manage some of the financial crisis rescue programs. (For more see the Special Report that Jenn Ablan led earlier this year on Gross and his empire, Twilight of the Bond King).

What investors can look for in 2013

By Matthew Goldstein and Jennifer Ablan

Big money managers do not always agree–that’s what makes a market–but if there was one consensus coming out of our just concluded Reuters Investment Outlook Summit, it’s that next year will probably be another bang up one for the bond market.

Now the credit markets will have a tough time repeating the kind of numbers put up this year, especially with the Federal Reserve doing its darndest to push down borrowing costs and yields by buying  mortgage backed securities and even Treasuries. Speaker after speaker who joined us in New York said “junk” bonds, corporate debt, mortgage- and commercial-backed securities and even Treasuries “on a trading basis”  should do well for no other reason than credit markets still aren’t showing anything close to the kind of froth we saw in the run-up to the financial crisis. The sense is that it may be another 2 or 3 years before we see excesses build up in the system again.

Oh sure, there are exceptions such as, bonds being sold by companies to pay special dividends to their private equity backers (several speakers said to avoid these). Other guests also are wary of the junk bond market, noting with yields coming down the risk to reward premium isn’t looking as good as it did earlier this year. And at least one speaker said he would avoid mortgage REITS because there’s too much leverage baked into their holdings.

from Lauren Tara LaCapra:

As Morgan Stanley drops “Smith Barney,” some wonder about the brand

At the Goldman Sachs investor conference on Tuesday, Morgan Stanley wealth management executive Greg Fleming ran through his 31 slides like a financially savvy drill sergeant, with a full discussion of margins, lending, technology, "value propositions" and "illustrative solutions."

But in the Q&A session, he was asked an unusually thoughtful question by an audience member: What about the brand, and the culture, of Morgan Stanley Wealth Management?

As Morgan Stanley has taken control and increased ownership of the Smith Barney retail brokerage from Citigroup, legacy Smith Barney brokers have often complained about what's happening to the culture. Morgan Stanley is all about numbers and metrics, they say, expecting brokers and managers to constantly do more with less.

While you were sleeping (the China ISM number came out)

By Katya Wachtel

For Omega Advisors’ Steve Einhorn, the window of sleep-able hours is narrowing.

“One needs to know whats going on around the world. I turn in around midnight so I can monitor what’s going on in China and Japan,” Einhorn, vice chairman at Leon Cooperman’s $7billion fund, said at the Reuters Global Investment Summit last week.  ”A decade ago, did I and most others focus on what’s going on in China? No. Now we wait for the November manufacturing index for China to come out. The day is longer because of that. I am up around 6 in the morning; I review what has gone on overnight in Asia and in Europe. I spend an hour in front of the machine at home, going through data and news releases” before he’s out the door.

This was undoubtedly the most common refrain when we asked some of Wall Street’s savviest money managers and investors how they begin their day, and with what must-read literature, during the week-long summit.

Eminent domain or principal reductions, the bottom line is reducing mortgage debt

By Matthew Goldstein and Jennifer Ablan

It’s been almost six months since we first reported on the plan by Mortgage Resolution Partners to find a community willing to use eminent domain to condemn and restructure underwater mortgages and pay a handsome fee to the private investment group for overseeing this process. The proposal has generated a lot interest, debate and heat, but so far  no community is yet willing to go down this road.

Still, Steven Gluckstern, chief executive of the San Francisco-based group, said he’s confident that by early next year some community–most likely one in California–will go forward with the idea of condemning underwater mortgages and rewriting them so cash-strapped homeowners can afford the payments and stay in their homes.

But Gluckstern, in an interview with ReutersTV as part of the Reuters Investment 2013 Outlook Summit, was also a bit realistic and said if nothing gets done in the first-half of next year it may be time for his group to pack it in. In the interview, Gluckstern said he and his investors were a little taken aback by the organized opposition from investors in mortgage-backed securities, who would take a financial hit in any condemnation proceeding.

Becoming comfortably numb to income inequality

By Matthew Goldstein and Jennifer Ablan

About a year ago, Nobel Prize-winning liberal economist Joseph Stiglitz made a surprise appearance at the Occupy Wall Street camp site in Zuccotti Park, giving a speech to rally the protestors and support their causes of bringing attention to the economic divide between the 1 percent and everyone else in the U.S.

Today, the protestors in lower Manhattan have all but disappeared with the attention on Occupy Wall Street gone along with it.

Stiglitz said the effort wasn’t for nothing, however.

“I think Occupy Wall Street served a function in that it brought to the attention of the American public two things…the distortion of our economy and inequality,” Stiglitz told Reuters TV this week in a wide ranging interview (led by Jenn) at Columbia University, where his a professor. Stiglitz said the protests helped serve notice that while a small group of Americans are doing far better than the other 99 percent, “we all have to get together” for the country to truly prosper.

Greg Smith says Goldman’s response confirms his criticisms: Q&A

Greg Smith, the ex-Goldman Sachs salesman who stunned the investment bank with a scathing public resignation in March, is now on the defense.

Smith, whose book, “Why I Left Goldman Sachs” hits bookstores today, has been facing the wrath of Goldman, media critics, and online commenters since last week, when bits and pieces of his book began to leak out and Goldman quickly jumped at the chance to characterize him as an undistinguished ex-employee with an ax to grind.

Goldman said Smith quit because he didn’t get the raise or position he wanted. It has also tried to cast doubt on the veracity of his claims by making other current and ex-Goldman employees available for media interviews to dispute Smith’s characterization of events in his book anecdotes.

Wall Street pay: Headed up or down?

It was a good third quarter for Wall Street profits and an even better one for employees: Goldman Sachs and Morgan Stanley set aside another $7.6 billion in compensation during the period, with year-to-date pay for the average employee up 15 percent at Goldman and 3 percent at Morgan Stanley.

Total comp accruals for both firms so far this year are up to $23 billion, 2 percent higher than the amount set aside a year ago. That equates to or 47 percent of adjusted net revenue, down from 50 percent for the first nine months of 2011, but still much higher than the pay levels some shareholders are demanding.

The data are a little befuddling, since New York State Comptroller Thomas DiNapoli recently said he expects Wall Street to lose jobs this year, and for pay to drop. Recruiters and Wall Street pay consultants have also said they expect pay to either decline or remain relatively flat for many kinds of traders and bankers this year. And JPMorgan’s investment bank has already started chopping down banker pay.

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